Start of a bull market

ANALYSTS optimistic about the new year for the CQ resources sector.

Wednesday 07 December 2016

A mining analyst with decades of experience in the resources sector says we might be in the first stage of a bull market.

While this doesn’t rule out a shorter-term correction to near record coal prices, Peter Wright from Bizzell Capital Partners says the lack of new investment in base commodities will have an impact.

“In the end, it’s all about supply and demand,” he told Shift Miner.

“Coal and all the other base metals are stronger and have stayed that way for a while now, which is a sign that we are in the first stages of a bull market for the resources sector.

“However people remain sceptical about how long they can last, but it's important to remember that we've been through a historic period of under-investment in the resources sector.

“For example, the last new coking coal mine was Caval Ridge, and that was five years ago.

“This is oversimplified, but the IMF predictions of around 3 percent global growth each year means demand for commodities should increase accordingly.

“But if you have no new supply then you are going to see a tightening in the market followed by price rises.

“If nothing else, the recent increase in the coking coal price shows us just how delicately balanced supply and demand are.”

Mr Wright's view is echoed by other analysts, including Citibank who predicts better prices and unchanged costs of production, will mean good times ahead for miners.

“After a decade or so of the mining industry defending its dysfunctional behaviour (high CapEx and running for volume over value) we think that there are enough signs that there is an alteration in behaviour which could lead to value creation for the companies over the next few years,” they said.

“Moreover fiscal stimulus measures are mounting in OECD countries, and this is all pointing towards global growth.

“On the supply side, there are indications that the mining companies appear to be holding the line, and will run for value over volume, leading to anaemic volume growth outlook on our forecasts.”

Citibank predicts companies like Whitehaven Coal could generate free cash flow of 28 percent next year if current prices remain. Even if the spot coal price falls by nearly a third, Citibank says free cash flow would still be around 26 percent.